Small-cap income: 3 of the best shares to buy for rising dividends

Market minnow stocks don’t have a reputation for being the best shares to buy for income, but Paul Summers would consider these three dividend hikers.

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Ask investors to name dividend-paying companies and I suspect they’ll automatically think of the biggest stocks on the market. This is entirely reasonable given the huge yields offered by some FTSE 100 members. Based on my research, however, I think some small-cap stocks could be among the best shares to buy, at least based on their track records of raising payouts. 

Jersey Electric

As its name suggests, market minnow Jersey Electric (LSE: JEL) supplies electricity to approximately 50,000 domestic and commercial customers on the island. Importantly, it’s the only company to do so, making it arguably as defensive as small-cap stocks come. 

As a result of this, Jersey has shown itself to be an extremely consistent dividend raiser (+5% every year).  A total payout of 17.3p per share is expected in FY21. That’s a 2.9% yield; not massive but easily covered by profit.

As one might expect from a solid income payer, however, JEL’s share price performance has been adequate rather than explosive. The stock is up 44% in value since 2016. That’s clearly a whole lot less than other UK shares. So, a danger with JEL is that I wouldn’t get much in the way of capital growth. A valuation of 16 times earnings for a predictable utility stock isn’t exactly cheap either. 

Still, that predictability might suit me down to the ground if income were a priority. If/when markets correct, I can be pretty confident that JEL will recover quickly. That’s exactly what happened last year. 

NWF 

Small-cap NWF Group (LSE: NWF) describes itself as a “specialist distributor of fuel, food and feed across the UK“. Like Jersey Electric, it’s also a brilliantly regular dividend hiker. This potentially makes it another one of the best shares to buy at this end of the market spectrum.

The company is down to return 7.34p per share to holders in FY22, at least according to analysts. That’s a yield of 3.43% at last Friday’s closing price. Some might say that’s not enough given that shares in minnows can be pretty volatile due to their illiquid nature. Margins are also wafer-thin.

In NWF’s defence, its annual payouts are usually very well covered by profits, making them pretty secure. That’s more than you can say for some far larger stocks these days. On top of this, NWT’s shares aren’t expensive relative to the wider market. I could pick some up today for 12 times forecast earnings. 

Wynnstay

Agricultural product manufacturer Wynnstay (LSE: WYN) has shown itself to be admirably predictable when it comes to returning cash to its owners. We’re talking about an average hike of +5%, with the total sum always covered by profits.

A potential 15.2p per share in FY21 would give a yield of 2.7%. That’s the lowest of those mentioned here. However, it’s important to consider the impact of many years of compounding that regular dividends enable.

There are drawbacks, of course. Margins, like those at NWF, are seriously low. And, although performing superbly over the last year (+64%), WYN’s shares are now only back to the level they were in 2016. Like most things in life (and investing), I think balance is key. I would never fill an income-focused portfolio solely with small-cap stocks.

So, while Wynnstay might make a nice addition, I’d aim to reduce volatility by also holding some larger dividend hikers as well. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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